Leveraging EO for Commercial Success

The author, Ruth Baker, considers how her own journey into EO underpins her value as an independent trustee and shapes her perspective when working with transitioning companies

Employee ownership can represent a transformative opportunity for businesses to align the interests of their workforce and leadership, fostering shared commitment and long-term stability. By prioritizing the principles of collaboration and mutual investment, companies can unlock tangible benefits that extend far beyond the financial. To generate full benefit from EO there needs to be clarity of purpose and future direction, as well as an understanding across all employees of both the potential benefits as well as the expectation of their contribution. Here we identify a few of the advantages of EO. Driving Engagement and Commitment One of the standout advantages of employee ownership is the way it empowers employees. When they hold a meaningful stake in the company, their day-to-day work directly contributes to its success, creating a stronger sense of accountability and purpose. This commitment often translates into higher engagement levels, as employees feel personally invested in achieving goals and driving innovation. Key to delivering against this is explaining where and how each individual, and their role can, and does, make a difference. Building Resilience for Economic Challenges Employee-owned companies are uniquely positioned to navigate economic uncertainties. The shared ownership model fosters a collective spirit that can strengthen a business’s ability to adapt and endure. Resilience is built not just through financial stability, but through the unity and determination of a workforce working toward common objectives. This resilience will not mean that tough decisions will not have to be made, but it should mean that such decisions are made from a wider perspective than pure financials. As such, these businesses are more likely to weather external impacts without resorting to lay-offs or shrinkage. Attracting Talent and Retaining Expertise In competitive industries, the promise of employee ownership can serve as a compelling incentive for recruitment and retention. Offering equity or ownership stakes sets businesses apart, providing a tangible demonstration of their commitment to employee welfare and growth. For those seeking long-term career opportunities, employee ownership usually translates into offering in role development and investment in people, making it an attractive proposition. Strategies for Effective Implementation To make the most of employee ownership, businesses must focus on several key strategies: Embedding a Collaborative Culture : Encouraging open dialogue and transparent communications reinforces the principles of ownership, driving both engagement and innovation. Educating Employees : Ongoing education and training ensure employees are equipped to make meaningful contributions to the company’s performance, and commit to a long-term commitment to stay. Strategic Goal Alignment : Clearly defined goals that align with business goals can help employees and leadership work harmoniously toward shared objectives. Monitoring Performance : Using metrics to track the impact of employee ownership ensures businesses can refine their approach over time, identifying further opportunities and maximizing benefits for all. A Model for Sustainable Success Leveraging employee ownership is not just about reshaping company structures - it’s about fostering a new mindset, one that prioritizes collaboration, resilience, and shared prosperity. By embracing this model, businesses can position themselves as leaders in sustainable growth, innovation, and employee empowerment. If you would like to benefit from the combined experience and knowledge of IDT and its members, consider appointing one of our trustees as your independent trustee. Whatever stage of EO you are at, whether you are a large or small organisation, are seeking your first, or a new or additional, independent trustee, we are sure we have somebody who could work with you for the benefit of your EO business. If you would like to know more, or would like to schedule a confidential, no strings, chat about your independent trustee requirements, please email info@directorsandtrustees.co.uk

Through personal knowledge, the author, Tony Marks , considers how his perspective as an entrepreneur and vendor of a business sold into employee ownership, shapes his perspective and his contribution as an independent trustee. What is your professional background, and how does it inform your approach as a trustee? I have 30 years of Board experience, working for organisations as large as BT PLC and as small as the two start-ups which I grew and subsequently sold - the most recent sale being to an Employee Ownership Trust. I have a commercial background with sales and marketing experience, as well as subject matter expertise in project management, including authoring and co-authoring books in this field. Academically I have an MBA, am Chartered Manager (CMgr) and a Fellow of both the Chartered Management Institute (FCMI) and The Association for Project Management (FAPM). This practical and theoretical knowledge and understanding supports my contributions to the trust boards on which I am appointed, as well as my interactions with the leadership teams in these EO companies. Apart from understanding what it takes to start and build companies with multi-million-pound revenues, I have been through the EO journey successfully as a Vendor - obtaining the full market value of the company I and my co-founders created, whilst propelling the company into an exciting new phase of high growth that benefits all the employees now and in the future. Through this journey I gained an unrivalled understanding of the art of balancing the needs of vendors and the needs of employees. This can and needs to be a win-win equation, ensuring that the vendors get paid for the value they have created, whilst ensuring the long-term sustainability of the business and security of employment for the employees. Where do you add most value to a trust board? The Independent Trustee has a unique role in balancing the needs of the Vendors until they have been fully paid and ensuring the long-term sustainability of the business and employee engagement in the business they now own. This can and should be mutually beneficial. This role needs the experience of someone who has been on the full journey , understands the issues that can arise, and promotes the constructive and inclusive approach needed to complete the journey successfully. My background and experience in governance roles, within businesses, EO Trusts and Academia, brings a unique insight to any EOT. Understanding the difference between governance and management responsibilities is key to guiding new Trustees in their role. By helping develop a positive and constructive spirit between vendors, management and employees working collaboratively , I bring a tangible additional value to any EOT as an Independent Trustee. My experience with several EOTs, alongside my membership of IDT, also ensures that the statutory responsibilities of the EOT and adherence to the Trust Deed and other relevant legal documents are maintained. How do you view Employee Ownership? Employee Ownership isn’t for everyone. I believe in ‘ Good EO ’ – doing it for the right reasons and for the benefit of all parties. This philosophy is fundamental to what I believe makes EO work successfully. Put simply, employees who feel like they co-own the business they work in are more engaged in delivering within their business and making it great. This leads to improved efficiencies, greater commitment and an inclusive team-based approach to problem solving. Of course, management is still running the business but sharing the challenges and business strategy and linking this to individual and team contributions make an incredible difference to business performance. Engaged employee owners will see gradually improving benefits, beyond the tax-free bonus permitted by HMRC, when the business is performing well. Vendors who believe in Good EO can unleash the full potential of the employee-owners by engaging them in the business mission. This can lead to early re-payment, improved terms and conditions and a stronger business into the future. EO is a unique environment where everyone can, and should, win. The IDT Difference IDT supports independent trustees to recognise, value, use and share their own unique personal experience and expertise in delivering in their role for clients. Our in-house EO Toolkit supports our trustees by providing practical tools, materials and knowledge to enable them to be an invaluable partner on the trust boards to which they are appointed whilst ensuring that they have the EO knowledge needed to deliver in the role. Our in-house trustee networking, centered around monthly knowledge sharing, enables our trustees to share their knowledge and challenges with each other to gain from the collective expertise available by being part of our network. Tony is one of our vendors working as independent trustees through IDT, all bringing their unique perspective, experience, knowledge and personality to their appointments, as well as an ability to share their knowledge in an advisory and consultative manner. To find out more about the breadth of this knowledge, as well as that of our other independent trustees, read our article introducing our trustees: : https://www.independentdirectorsandtrustees.co.uk/who-are-our-trustees The Author Tony Marks is a project management expert, author of books on the topic and an experienced board member. He transitioned his own business to employee ownership in 2018 and is about to step down as a Founder Trustee. He works with IDT clients as their independent trustee across England and Scotland.

Successful employee ownership (EO) succession requires balancing continuity with careful planning and preparation. The process should maintain business stability while gradually transitioning responsibilities. A clearly defined and communicated purpose, set of values, and ownership model can guide the organization through the change, ensuring alignment and clarity for both founders and new leaders. Here we introduce some key themes, emerging developments and related actions to help navigate this process: Key Themes 1. The Importance of a Common Purpose: Define a guiding framework for the business: Purpose: The overarching reason for the company’s existence. Values: Core principles that drive decisions and behaviours. Ownership Model: How employee ownership functions in the organization. Document the company’s purpose, aspirations, and history to maintain continuity and preserve the legacy of founders. Video recordings can be a practical way to capture this. 2. Maintaining Continuity: The succession process should aim to feel like “business as usual.” A rolling 5-year plan provides structure and flexibility to adapt as needed. Customer relationships and operational stability must be prioritized during transitions to ensure minimal disruption. 3. Gradual Transition with a Long-Term Break: A transitional phase that incorporates a long-term break of a few months allows founders to step back while remaining available to provide support. During this period: Some employees may step up without he Founders influence being in place; Some employees may opt out of leadership roles, as not all staff may want or be suited for leadership. Founders can still be available if needed but, crucially, should not step in unless requested; Founders can start to practically envisage, and plan for, their future after they leave, building their personal enthusiasm for their own future outside the business. 4. Thorough Succession Planning: Begin planning well before the transition, identifying gaps in roles such as sales, innovation, HR, admin, and regulatory tasks. Recruitment and development should focus on filling these gaps and preparing the next generation of leaders. The long-term break is an opportunity to test and refine the decision-making process and ensure new leaders are supported. 5. Founders’ Role Post-Succession: Founders must prepare for life outside the business by identifying new pursuits or roles to transition into. The transition is smoother when founders have a clear path forward, reducing the temptation to interfere in day-to-day operations. 6. Avoid Incentive Misalignment: Avoid introducing new incentive plans that could complicate the succession process or undermine the purpose-driven ethos of EO; If implementing leadership incentives, ensure they are aligned to clear deliverables, are flexible enough to incorporate new appointees, and don’t include those who are not in a leadership or significant role; Ensure any historical favouritism is left behind on transition. 7. Preserving Culture and Legacy: Record the history and stories of the company and its founders to maintain a sense of heritage and identity; Identify the core values that define the company; Don’t set it all in stone, elements of this need to be able to flex and change as the business evolves. Emerging Developments 1. Balancing Leadership Expectations: Succession plans must account for varying levels of interest and capability among employees, acknowledging that not all will aspire to leadership. 2. Founder Involvement as Advisors: Founders can remain involved in non-operational capacities, such as chairing the trading board, whilst empowering the new leadership to run the business. 3. Pragmatic Planning: Succession plans should address practical gaps, such as regulatory compliance or administrative tasks, which founders may have managed in an ad hoc manner. 4. Gap Filling: Be prepared to fill gaps if employees loyal to the Founder choose to move on at the same time and take this as an opportunity to review and refresh the skills needed in the future business. 5. Vision Alignment: Ensure that all employees are aligned with the company’s Common Purpose helps smooth the transition and fosters a shared sense of contribution and alignment to the future business. EO succession is a logistical, cultural and personal transition. A clear Common Purpose, detailed planning, and phased implementation ensures continuity and stability. Founders must embrace a supportive but hands-off role, empowering new leaders while preserving their legacy. By prioritizing clarity, alignment, and gradual handover, businesses can navigate the complexities of succession with minimal disruption and long-term success. Amongst our independent trustees we have founders who have successfully transitioned their businesses to employee ownership and now share their experiences through their activities as independent trustees. If you would like to benefit from the combined experience and knowledge of IDT and its members, through the appointment of an IDT independent trustee or if you would like to know more, please email info@directorsandtrustees.co.uk

In its first budget announcement after its election victory in 2024, the Labour government increased the rates of capital gains tax (CGT) in relation to the sale of shares but has maintained CGT relief for sales to EOTs. This is good news for employees as well as business owners who will continue to benefit from tax free sale proceeds provided they comply with the qualifying conditions. However, a number of changes were announced in relation to EOTs that are currently being finalised and, once confirmed, will be back-dated to take effect from 30 October 2024: HMRC reporting requirements Tax advisers for the selling shareholders are now required to include more information to claim CGT relief on the sale proceeds including the number of employees of the target company at the time of disposal and the purchase price payable. Control of EOT Selling shareholders (and persons connected to them) are now prevented from directly or indirectly controlling the EOT, either as chair or through a majority of members of the trust company. This is expected to result in the appointment of more independent trustees and employee representatives to trust company boards. No similar restriction has been placed on the selling shareholders in respect of the trading company. EOT tax residency The trustees of the EOT must now reside in the UK at the time of disposal, so no offshore trusts permitted. Market value Trustees must take “all reasonable steps” to ensure that the purchase price paid for the target company is “no more than market value”. Independent valuations are therefore recommended, as is appointing trustees early in the process so they can properly consider and take appropriate actions. A second valuation for trustee validation may be beneficial in certain circumstances. Tax treatment for EOT expenses The government has confirmed that contributions made by the trading company to the Trust in order to pay the selling shareholder for their shares will not be treated as distributions for tax purposes. This would include associated Stamp Duty, any interest payable at a reasonable commercial rate and Trust expenses. This would only apply if the consideration paid by the trustees for the shares does not exceed the market value for those shares (see above). Extension of “vendor clawback period” The government has extended the period in which HMRC may withdraw CGT relief for the sale proceeds to the end of the fourth tax year following the end of the tax year of disposal of the target company if a “disqualifying event” takes place. In effect, any onward sale of the trading company during this restricted period will crystallise a CGT liability for the vendors. Tax free bonuses The government has confirmed that tax-free bonuses of up to £3,600 per employee may now be awarded to all participating employees without directors being included. This ensures that non-payment of company bonuses to vendors who remain as a company director will no longer breach the equality requirements. This is the only measure included that is applicable to EOTs that were in place prior to 30 October 2024. Conclusion The previous government consulted on many of these changes so they were not unexpected, but it is important to fully understand the proposed changes to avoid a disqualifying event which may lead to withdrawal of your CGT relief. These changes do provide clarity on Employee Ownership as a viable exit solution with preferential tax treatment compared to a trade sale or private equity investment. However, sales to EOTs are not a solution for a company already in financial distress. A version of this article was originally published in November 2024 by Keystone Law https://www.keystonelaw.com/keynotes/what-changes-are-being-introduced-for-employee-ownership-trusts . The author, Andrew Bretherton, is a corporate lawyer with Keystone Law, and an independent trustee with IDT.

A trustee perspective from Craig Carey on why effective communication is so important, especially in an EO business

How defining company values can be beneficial, and how they can underpin positive EO culture

How and when to share information, and what information should be included is a frequently discussed topic. Here we share ideas and prompts to craft your own information sharing processes and content.

Through personal knowledge, the author, Alistair Aird , shares how his experience and expertise in finance and supporting SME business leaders underpins his role as an independent trustee. What is your professional background, and how does it inform your approach as a trustee? My professional background is in SME M&A and banking. I see that as essentially supporting SMEs from a financial point of view, normally at key points in their evolution – for example, when they are financing rapid growth, exiting, or buying other businesses. An employee owned business, whatever its size or maturity, faces similar financial considerations in terms of business funding, managing cashflow, balancing risks and evolving for the future. In terms of how it informs my approach as a trustee, I understand how the finances are the essential lifeblood of any business, and I bring that expertise and understanding to the trust board. For example, key areas at the point of transition are the valuation and repayment profile of a transaction, where my experience can be especially valuable. Thereafter, where there may be considerations for altering the repayment profile, whether in terms of tenor, applied interest (if any) or financial quantum, my knowledge and experience can add a neutral perspective and experience to discussions. I also share my financial literacy with fellow trustees to enhance their understanding of both the financial information that is being provided to them, as well as the impacts that financial decisions will have on the business. This is particularly relevant where there may be employee trustees appointed who may not have previously been provided with in-depth financial company information, or may not have had to digest it from the position of a shareholder. What are some unique aspects of your approach that differentiate you from other trustees? Whilst finances, and specifically cashflow, are the lifeblood of the business, I have learned that the individuals are the most important area to understand. I focus on ensuring I understand the individual priorities and ambitions of exiting shareholders in particular as that can significantly impact the business in its early stage as it evolves its succession plans and moves towards financial freedom. On a personal level, I know how stressful it can be at these times in a business-owners life and I can help owners navigate the change away from personal ownership into employee ownership, and beyond. In terms of my approach as a trustee, I set out to have a light hand on the rudder during plain business sailing as I believe the leadership team are best placed to run the business. But I am prepared to get a firmer grip should there be issues that need addressing at trust level. This is not solely in terms of financial matters, given the trust in its role as shareholder has a wider remit in respect of the whole business. Whilst my background is finance, my experience is much wider, so my contribution in all topics comes from one of broad business knowledge. How do you think the October 2024 UK budget changes have impacted you and your role? One of the most significant changes announced, from a trustee perspective, was the requirement for trustees to validate the valuation of the company prior to its transition to EO. My job in M&A has meant I have done many valuations for businesses transitioning to EOTs. Understanding such valuations, repayment profiles and other financial matters related to ensuring a successful transaction is a particular area of expertise. I have used this to work with colleagues at IDT to develop a trustee checklist for valuation validations focused on four key areas: Independence of the valuation provider; Valuation methodology; Affordability of both the principal payment and the deferred consideration; and Documenting the trustee process being undertaken. I continue to offer my knowledge, experience and advice to my colleagues, as well as my EO clients, to enhance their own understanding. Alistair’s knowledge and experience, particularly in terms of finance in SMEs, is invaluable to EO clients, particularly those seeking to enhance financial confidence in new leadership teams, in fellow trustees and more widely in the business. He has sat with clients as they move through periods of financial uncertainty and significant decision making, and his experience provides a beneficial sounding board and trusted confidante in discussions. The IDT Difference IDT supports independent trustees to recognise, value, use and share their own unique personal experience and expertise in delivering in their role for clients. Our in-house EO Toolkit supports our trustees by providing practical tools, materials and knowledge to enable them to be an invaluable partner on the trust boards to which they are appointed whilst ensuring that they have the EO knowledge needed to deliver in the role. Our in-house trustee networking, centered around monthly knowledge sharing, enables our trustees to share their knowledge and challenges with each other to gain from the collective expertise available by being part of our network. Alistair is one of over 20 independent trustees working through IDT, all bringing different perspectives, experiences, knowledge and personality to their appointments. To find out more about the breadth of this knowledge read our article introducing our trustees: https://www.independentdirectorsandtrustees.co.uk/who-are-our-trustees The Author Alistair Aird is a corporate finance director at Carpenter Box, a chartered accountant, tax and business advisory practice based in the South of England. He also supports IDTs business development through his connections with professional advisers and acts as the independent trustee for clients of IDT.